How to Study Economics?

Theory and facts To understand how economic works Facts without theory are useless Theory without facts is unsupported assertion Economic data To help us think about an economic problem Two types:Time series data Cross-section data

How to Study Economics?

Index numbers is a statistical measure of changes in a representative group of individual data points These data may be derived from any number of sources, including company performance, prices, productivity, and employment Example : Consumer Price Index (CPI), Producer Price Index (PPI).

Why study macroeconomics?

Are you hope to make money? Are you concerned to learn how budget deficits and

inflation will affect you in future? Are you curious to know why it is sometimes hard to find a job? Why are some people rich and others poor? Why foreign like Japan or Korea can produce goods so much cheaply than America? Why countries like Russia and China are moving from plan to a market economy? Are you curious to know how the global marketplace works?

What is macroeconomics?

What is macroeconomics? Macroeconomics can be best understood in contrast

to microeconomics Macroeconomics considers the larger picture which is the sum of all decision An understanding of microeconomics is crucial to understand macroeconomics "Macroeconomics is the branch of economics concerned with aggregates, such as national income, consumption, and investment "

What is macroeconomics? The branch of economics that studies decision

making for the economy as a whole (inflation, unemployment, economic growth, money supply, national incomes, business cycle)

Microeconomic aims/goals Firms aim to maximize profits

Consumers aim to maximize utility

Efficient resource allocation in competitive markets The correction of market failure through government intervention

Macroeconomic Goals Price stability Economic growth Full employment

Distribution of income

Price Stability A situation in which prices in an economy dont

change much over time This refers NOT to the prices of individual products, BUT to the price level as a whole A RISE in the overall price level is called inflation, a FALL is called deflation Would mean that an economy would not experience inflation or deflation However, it is not common in economy to have price stability

Economic Growth The most talked about macroeconomic goal Growth occurs when the total amount of goods and

services an economy produces increases from year to year A positive change in the level of production of goods and services by a country over a certain period of time Nominal growth is defined as economic growth including inflation Real growth is nominal growth minus inflation Economic growth is usually brought about by technological innovation and positive external forces

Nominal vs Real GDP Growth

Full Employment A situation in which all available labor resources are

being used in the most economically efficient way Does NOT mean every single person has a job Means that most people who want to work are working

Headline News

Equitable Distribution of Income

A nations income should be somewhat equally

distributed between the upper and lower classes in society Some tax systems are designed to achieved more equitable income distribution

Distribution of income

Macroeconomics Problems Undesirable situations that exist in the macro

economy One or more of the macroeconomic goals are not satisfactorily attained The primary problems are unemployment, inflation, and stagnant growth Macroeconomic theories are designed to explain why these problems emerge and to recommend corrective policies

Macroeconomics Problems Stagflation Inflation Deflation

Hyperinflation Recession Unemployment

STAGFLATION Wikipedia - In economics, stagflation is the situation

when both the inflation rate and the unemployment rate are persistently high.

Inflation in Malaysia 2011

Akhtar Aziz (The Star; May 24)

BNM increase Overnight Policy Rate (OPR) at 3% the rest of the year ; and increase statutory reserve requirement to 3%

Inflation 2011 As reported by Malaysian Institute Economic

Research (MIER), inflation is expected to trend upwards due to the

effects of quantitative easing in the U.S., geopolitical tensions in the Middle East and North Africa, and on the reconstruction of Japan.

Time Series Data

Year 1981 1982 1983 1984 1985 Inflation rate % 9.7 5.8 3.7 3.9 0.3

1986 1987 1988 1989

1990 1991 1992

0.7 0.3 2.6 2.8

2.6 4.4 4.8

Time Series Data

Year 1993 1994 1995 1996 1997 Inflation rate % 3.5 3.7 3.5 3.5 2.7

1998 1999 2000 2001

2002 2003

5.3 2.7 1.5 1.4

1.8 1.0

Time Series Data

Year 2004 2005 2006 2007 2008 Inflation rate % 1.5 3.0 3.5 7.4 12.3

2009

4.0

Source: The World Bank Data

Tutorial 1 Find out inflation situation in 2012 What are the factors? Discuss

What is deflation?

Deflation In general, deflation is when the average price of

goods goes down When the inflation rate falls below zero, showing negative inflation, we know that there has been deflation

What ishyperinflation?

Hyperinflation Extremely rapid or out of control inflation Germany after World War I (inflation rate 322) In Hungary after World War II - Between August

1945 and July 1946 the general level of prices rose at the astounding rate of more than 19,000 percent per month, or 19 percent per day Cause war and increase in money supply

Hyperinflation in HungarySweeping up the banknotes from the street after the Hungarian peng was replaced in 1946

Hyperinflation in Germany

Germany, 1923: banknotes had lost so much value that they were used as wallpaper.

What is recession?

Recession Period of general economic decline, defined usually

as a contraction in the GDP for six months (two consecutive quarters) or longer. In usual dictionary definition is a period of reduce economy activity The NBER define a recession as a significant decline in economic activity lasting more than a few months.

Recession Marked by high unemployment, stagnant wages,

and fall in retail sales a recession generally does not last longer than one year and is much milder than a depression

Funds will be injected into the banking system to

Contractionary Monetary Policy

To combat inflation Decreasing money supply leads an increase in

interest rate How? Withdrawing funds from the banking system and raising interest rates The higher interest rates will encourage people to save more and spend less More expensive for people to borrow money

GDP growth and public expenditure share to GDP (%)

Aggregate Demand The total amount of goods and services demanded in

the economy at a given time period. Describe relationship between price levels and aggregate output Negative relationship Also known as total spending Formula: AD = C+I+G+(X-M)

Aggregate Supply A total supply of goods and services produced in the

economy at given overall price level at given time period Positive relationship between price and output Also known as total output

Government spending increases

Shifts in AD Consumer expect a recessions They will not spend as much money today as to save for a rainy day Thus, if spending has decreased, then AD must decrease Shown shift to the left

Consumer expect a recessions

Shifts in AD Foreign income rises We would expect that foreigners would spend more money both in their home country and in ours A rise in foreign spending and exports increase AD AD curve shift to the right

Foreign income rises

Shifts in AD Foreign price levels fall If foreign price fall, then foreign goods become cheaper We expect that consumers in our country are now more likely to buy foreign goods and less likely to buy domestic made goods Thus, fall in AD AD curve shift to the left

Foreign price levels fall

Government spending increases

Shifts in AS Size and quality of labor Technological innovations Increase in wages

Increase in production costs

Changes in producer taxes and subsidies

Technological improvements

Shift in AS Workers expect inflation and negotiate higher wages

now

If the cost of hiring workers has gone up, then companies will not want to hire as many workers AS would shrink, and AS curve shift to the left Reduction in real GDP as well as increase in the price level The expectation of future inflation has caused price level to increase today